Coverage Issues in the
Government Reimbursement of Drugs: Some Legal and Policy
Issues

Charles A. Lubinsky

Although the 103rd Congress, despite much
anticipation, did not enact any health care reform legislation,
many of the problems which led to proposals and consideration of
reform still remain. Health care costs are still
increasing,[1] though growth has slowed.[2] Large portions of the United States population
remain uninsured or underinsured.[3] It would not be surprising if some form of health
care reform reappeared on the scene some time in the near
future.

In this paper, I discuss one element of government
health care coverage which must be considered as part of any
comprehensive health care reform effort ó drug
coverage.[4] Drugs are an important part of health coverage, and
are likely to become even more significant[5] Payments for drugs were approximately 8.1 percent of
total health care expenditures in 1991, totaling over $60
billion.[6] In addition, drugs are intricately involved with
many of the problems which people see as requiring reform. Drug
prices, like the cost of health care in general, have increased at
a much faster rate than other prices in the economy since
1980.[7]

Insurance coverage of drugs, both public and
private, varies considerably.[8] Although the elderly population is one of the major
consumers of drugs,[9] Medicare, the primary elder insurance plan, does not
generally provide coverage for prescription drugs.[10] Drug reimbursement under government insurance has
been debated since the initial passage of the Medicare and Medicaid
legislation.[11] Congress reexamined the issue throughout the 1970s
and 1980s.[12] Drug coverage under Medicare was actually provided
in the Medicare Catastrophic Coverage Act of 1988,[13] but then rescinded when most of the act was
repealed a year later.[14] Drug coverage was proposed as a benefit for both
the Comprehensive Benefit Package under the Alliances and under
Medicare as part of President Clinton's proposed Health Security
Act of 1994.[15] States have the option under Medicaid to cover
drugs, and most do.[16]

The paper is divided into three sections. In the
first section, I describe four different public sector schemes for
government coverage of drugs. First I outline the existing drug
coverage system under the two dominant government health care
programs, Medicare and Medicaid. I then outline proposals contained
in the Medicare Catastrophic Coverage Act of 1988 and the Health
Security Act of 1994. The second section examines coverage
differences between the four schemes and shows where each plan
allocates flexibility regarding coverage issues. The final section
addresses some of the difficult issues surrounding drug coverage,
and discusses whether and how the four schemes described address
these issues. I examine three problems: (1) Should drugs be covered
at all under a government health insurance plan? (2) How should
coverage be related to approval by the Food and Drug
Administration? and (3) How should over the-counter drugs be
treated? While this discussion may not definitively show how a
future drug benefit should look, it does outline a number of issues
which should be taken into account.

I.ADescriptionofFourDrugReimbursementSystems

Of the four drug reimbursement systems described
below, all but the Clinton Plan deal exclusively with government
reimbursement. (The Clinton Plan also includes a drug benefit in
its Comprehensive Benefit Plan applicable to all health plans.)
However, drug reimbursement is obviously an issue with relevance to
private as well as public insurers.[17] There are a number of reasons for focusing on
public insurance. Public insurers are quite large and are often
industry leaders when change happens.[18] This is especially true for the elderly, who
are large users of prescription drugs. Also, focusing on public
insurance provides a simplified way to examine reimbursement
issues. Finally, legislative reform is most likely to affect the
public sector (barring passage of comprehensive health care
legislation).

The first two descriptive summaries require a brief
introduction. Medicare and Medicaid are both government-run health
insurance systems, but are administered in very different ways.
Medicare is targeted primarily at the elderly and disabled
population and is funded and administered by the Federal
government. Medicaid is targeted primarily at the poor and is
jointly funded and administered by the Federal government and
individual stales. As a result, while Medicare benefits are
relatively uniform across states, Medicaid benefits vary widely
both in scope and in degree.[19] However, the Federal government does set minimum
standards for the Medicaid program. Both programs utilize local
insurers (usually Blue CrosslBlue Shield or Aetna) to provide
actual payments to providers.[20]

Medicare is divided into two separate programs,
Part A and Part B.[21] Part A deals primarily with facility-based
in-patient care, while Part B deals with out-patient care and
physician reimbursement. Part B requires a premium payment. Drugs
are treated differently under the two different Parts, though the
definition of a drug is defined statutorily for both sections. To
fulfill the Medicare definition of a drug, the drug must be either
included, or approved for inclusion, in one of the official drug
compendia[22] or be approved by the facility medical staff's
pharmacy or drug therapeutics committee.[23] FDA approval automatically fulfills the statutory
requirement when used for the approved indication.[24] The statute provides an explicit exception for
anti-cancer chemotherapeutic cancer drugs, which have been approved
for a medically accepted indication and distributed by the National
Cancer Institute.[25] Reimbursement under Medicare must also be
"reasonable and necessary."[26] Carriers under Medicare have significant
discretion in deciding what type of drugs are reasonable and
necessary in the absence of HCFA direction.

Under Part A, drugs are generally covered when
provided as a benefit incident to a hospital visit. However, they
must be furnished for use in the institution, must represent a cost
to the institution, must be ordinarily furnished,[27] and must fit the Medicare definition of a drug. In
general, this means that investigational or nonapproved drugs are
not reimbursed.[28] However,

unapproved uses of approved drugs may be allowed
depending on the generally accepted medical practice in the
community.[29]

Under Part B, prescription and non-prescription
drugs purchased are not covered by Medicare, unless furnished by a
physician[30] and fulfilling the Medicare drug definition. There
are a number of statutory exceptions to this general rule. For
example, "Group C" cancer drugs, as mentioned above, are
reimbursable under both Part A and Part B.[31] Other exceptions include flu, pneumococcal and
hepatitis B vaccines, some antigens, immunosuppressive drugs, and
osteoporosis drugs (until December, 1995).[32] However, a notice of hearing by the Food and Drug
Administration (FDA) under the Federal Food Drug and Cosmetic Act
(FFD&CA) § 505[33] regarding withdrawal approval for a drug (or a
similar drug) not subject to the 1962 Drug Amendments[34] precludes reimbursement under Part B.[35] This restriction does not apply to Part
A.[36]

In many ways the most controversial portion of the
Medicare drug coverage requirements has been the general Medicare
requirement that reimbursement be "reasonable and
necessary."[37] HCFA has interpreted this to mean that the item in
question must be (1) safe and effective, (2) not experimental or
investigational, (3) cost-effective, and (4) appropriate.[38] If HCFA has not made a national coverage decision,
the decision is left to the carriers)[39] Though experimental or investigational use
drugs are not reimbursed by Medicare, the unapproved use of many
FDA approved drugs is left to the Medicare carriers. Proposed
Medicare rules state that breakthrough procedures are judged by a
less stringent standard,[40] but it is unclear whether this applies to drugs as
well as procedures.

Some cases have also addressed the question of
whether HCFA regulations unlawfully interfere with the practice of
medicine in violation of the Medicare statute.[41] However, these cases have not met with much
success.[42]

BJM~

Because Medicaid[43] is primarily administered by the states, much
variation exists regarding precise coverage of certain benefits. In
fact, prescription drugs are an optional benefit under Medicaid. On
the other hand, some states may choose to cover non-prescription
drugs.

The Federal government provides guidelines for
states which choose to provide drug benefits. One baseline is the
statutory definition of "covered outpatient drug."[44] The statute states that the drug must be available
only by prescription[45] and must either be (1) FDA- approved,[46] (2) a pre-1962 drug (or a similar drug) which has
not been determined to be a new drug or to have inadequate
directions for use, or (3) a drug to which the 1962 Amendments do
not apply[47] (and for which approval has not been withdrawn).
The definition also includes prescription biological products
(other than vaccines) and insulin drugs certified under § 506
of the Federal Food Drug & Cosmetic Act. The definition
explicitly excludes drugs used for a medical indication which is
not "medically accepted"[48] A "medically accepted indication" is either the
FDA-approved use or a use supported by a compendia.[49]

States are allowed to limit coverage beyond the
definition of "covered outpatient drug."[50] Restrictions or exclusions are allowed for a
particular list of reasons.[51] The state may also choose to create its own
formulary[52] or require prior approval for drug
coverage.[53]

Unlike cases arising under Medicare, plaintiffs
have generally had more success in requiring Medicaid to reimburse
drugs despite initial coverage denials, if "medically
necessary."[54] This is true even for uses unapproved by
FDA.[55]

C.MedicareCatastrophicCoverageActof1988

The Medicare Catastrophic Coverage Act of 1988
(MCCA) provided for a number of new Medicare benefits, including
drug coverage, largely designed to expend coverage for the
elderly.[56] Although the statute was short-lived and the
benefit never implemented, we do have a relatively clear outline of
the proposed benefit from the statute, legislative history and
proposed regulations.

The basic statutory definition[57] of a "covered outpatient drug" is essentially
taken from the Medicaid statute.[58] The statute further excludes certain services
aiready covered elsewhere in the Medicare statute.[59] The statute states that the "Secretary shall
establish for each outpatient drug standards which are based on
accepted medical practice."[60] These standards shall incorporate authoritative
compendia[61] modified by "scientific and medical information
that such standard is not consistent with the safe and effective
use of the drug."[62] The statute explicitly prohibits the creation of a
Medicare formulary.[63] The "reasonable and necessary" statutory
requirements already contained in the Medicare statute would also
still apply.[64]

The Health Care Financing Administration (HCFA)
Notice of Proposed Rulemaking placed in the Federal Register
following passage of the MCCA gives further indications of how the
MCCA drug benefit would have been implemented. For example, the
proposal makes clear that, unlike Medicaid, "prescription drug"
really means only prescription drugs and may not include
nonprescription drugs.[65] The proposed regulations confirm that drug
standards promulgated under the act will use the three compendia
mentioned in the Conference Report[66] and that any deviation from the compendia must
use rulemaking procedures.[67] The proposed regulation asserts that payment may
not be made for specific uses which HCFA finds are not "safe and
effective for the diagnosis or treatment of illness or
injury."[68] However, the proposal also states that "standards
would not be used to define coverage or payment of covered
outpatient drugs under the Act."[69]

D. TheClintonHealthSecurityAct

On October 27,1993, President Clinton presented his
Health Security Act of 1994 (HSA) to Congress. Even though the
legislation was eventually not acted on by Congress, it was
extensively analyzed in both academic settings and in the media and
thus provides another possible model of prescription drug coverage
under a government plan. However, because the legislation was not
enacted nor fleshed out, the terms are substantially more vague
than an enacted statute (MCCA) or existing programs (Medicare,
Medicaid).

Inmanyways,theClifltonplafl15atlea5ttwoplan5inoneforthePIfl1~OseSofdrug
coverage. Drugs are included as a new benefit under Medicare and
are also included as part of the "Comprehensive Benefit Package"
which would be a floor for health packages guaranteed to the
general public.

The new benefit under Medicare, like the new
benefit proposed under the MCCA, adopts the Medicaid definition of
a "covered outpatient drug."[70] However, the HSA definition of "medically accepted
indication" is slightly expanded from the Medicaid and MCCA
deflnitionL Under the HSA, "medically accepted indication" includes
uses (1) for which the drug has been approved for use by the FDA
and (2) other uses if the drug has been approved by the FDA and
either the use is supported by the usual compendia[71] or the carrier involved determines that such use
is medically accepted based on peer review medical
literature.[72] As in the MCCA, the legislation provides for
promulgation of outpatient drug standards based on compendia and
modification by regulation.[73]

The drug benefit in the Comprehensive Benefit
Package refers to the (amended) Medicare definition of "covered
outpatient drug" and "medically accepted indication" except that
the Secretary (the Board in an earlier draft) is substituted for
the carrier in determining whether a use is medically accepted
based on clinical evidence in peer review medical
literature?[74]

II.AnAnalysisofDifferencesBetweentheFourDrugCoverageSchemes

To a large extent the differences between the four
drug coverage schemes are minimal. Three of the four (Medicaid,
MCCA and HSA) essentially define a "covered outpatient drug" in the
same manner. All utilize FDA approval as a way of certifying a
drug's safety and effectiveness to some extent However, there are
significant differences both between the MedicaidIMCCAIHSA
definition and Medicare's drug definition and among all four in
terms of how much flexibility the government has in defining drug
coverage.

The Medicare definition of drug, at least
textually, appears to be broader than the other definitions. While
the MedicaidIMCCA/HSA definitions state that a drug (1) must be a
prescription drug and (2) must either be FDA-approved or not
otherwise FDA-disapproved (i.e. a pre-1962 "old drug" or a drug to
which the 1962 Amendments did not apply), further coverage
requirements allow reimbursement for "medical accepted indications"
as defined either by FDA approval or by inclusion in a compendia.
The Medicare drug definition looks first to either compendia or
approval by a medical staff FDA approval for the approved use
counts as if in the compendia.

Examining these two definitions textually, there
are a few possible points of departure. First, a drug may be
recognized as a drug by an applicable compendia but which is not
approved by FDA. This type of drug would more likely be
reimbursable under Medicare than under the MedicaidIMCCA/HSA
definition. Similarly, a drug which is disapproved by the FDA may
still be eligible for reimbursement under Medicare Part A (though
Part B makes a specific exclusion for this situation) if either the
drug is included under a compendia listing or the medical staff
thinks the drug should be included in treatment On the other hand,
since Medicare reimbursement is limited to those treatments which
are reasonable and necessary, this may even out some of the
possible inequities. For example, experimental drugs are excluded
under Medicare's reasonable and necessary standard, but may
nevertheless be covered under the MedicaidIMCCAIHSA definition This
is similarly true with drugs which are not cost-effective. Finally,
and in some ways most importantly, because Medicare is limited to
facility-based care and generally excludes self-administrable
drugs, many more outpatient prescription drugs are and would be
approved under the MedicaidIMCCAIHSA schemes.

Among the MedicaidIMCCAIHSA definitions, HSA's
definition of "medically accepted indication" provides slightly
more discretion than the other two because it permits carrier
discretion to approved reimbursement for uses not approved by the
FDA. This does not exist either in the MCCA or Medicaid
definition.

Each scheme provides significant flexibility to
deviate from the basic drug coverage definition. Medicare allows
flexibility on a number of levels. First, coverage may vary on the
medical staff leveL This reflects our general tendency not to want
to interfere with the practice of medicine by health professionalL
Coverage may also vary on the carrier level. Since carriers have
responsibility for deciding what is reasonable and necessary in the
absence of Medicare direction, they may make significant drug
coverage decisions. HCEA may also issue directives at a national
level through a physician panel process, although they have rarely
done this.

In con~st, states under Medicaid may define whether
or not to cover drugs at all under their health plans. They may
also decide whether to use the baseline drug requirements or to be
even stricter. Rir example, states may set up formularies listing
drugs they will reimburse. However, formularies may give less
flexibility than it first appears. Because state Medicaid programs
are required to provide all medically necessary health care, state
Medicaid programs may be forced to include drugs recognized as
effective, regardless of cost?[75] For example, in 1992 three plaintiffs successfully
sued the state of New York to have clozapine, an anti-schizophrenic
drug approved by the FDA and for which there was no low cost
alternative, included in the New York State Medicaid
Formulary.[76] Because there is no check for cost-effectiveness,
this is in some ways less flexible than Medicare. Medicaid plans
can also require prior approval systems.

MCCA, while using the Medicaid definition of a
drug, did not offer the same kind of flexibility as Medicaid.
However, since it was designed as an addition to the Medicare
program, drugs would still be subject to the reasonable and
necessary statutory requirement Some flexibility issues are simply
not clear. Although the statute calls for HCFA to investigate the
safety and effectiveness of drugs independent of FDA's
determination, establish standards for each outpatient drug, and to
not make payment for uses that HCFA finds are not safe and
effective, the statute also prohibits the creation of a formulary
and regulations confirm that though rulemaking proceedings would be
necessary to deviate from standards derived from accepted medical
compendia, standards would not be used to define coverage or
payment. Thus is unclear how much discretion HCFA would have had in
setting coverage boundaries had the MCCA plan been implemented.

The HSA, as in the present Medicare system, would
have given significant flexibility to carriers to determine
coverage if HCFA, the FDA, and compendia do not address coverage.
However, like the MCCA, the HSA provided for outpatient drug
standards. Unlike the MCCA, there is no explicit prohibition
against either having a formulary or against using the standards to
define coverage. Interestingly, the health care benefit offered
under the comprehensive benefit package does not delegate analogous
authority to address coverage vacuums to insurers (the logical
analogy to carriers) but rather to the Secretary of HHS. This
essentially means that, assuming that some plans opt for a minimal
drug benefit, that the Medicare benefit may be more inclusive
(based on carrier discretion) than the minimum comprehensive
benefit package.

III.SomeImportantCoverageIssuesRegardingGovernmentDrugReimbursement

In this section 1 examine a number of the most
important coverage issues surrounding provision of a drug benefit
under a government health insurance plan. The discussion is
organized topically into three questions, but issues involved in
responding to the questions necessarily overlap. For example,
cost-containment is a concern for all three questions.

A. Shouldadrugbenefitexistatall ?

In many ways it is a reasonable question to ask
whether a drug benefit should exist at all. Although there may be
need, particularly among some elderly, won't a benefit simply wind
up costing too much money to implement? Won't people overutilize
covered drugs? Perhaps our money could be better spent elsewhere.
Medicare Part B has survived without a drug benefit~

These are not meritless arguments. Nevertheless,
numerous studies have shown that the market for medical drugs is a
favorable one for insurance.[77] Drug spending among the elderly is a skewed
distribution. The 11 percent who spend the most on drugs account
for nearly half (45 percent) of total drug
spending?[78] As long as these high costs are not foreseeable,
it makes sense to have insurance to spread the risk2[79] Especially in terms of a national health plan that
includes all elderly (thus discouraging adverse selection), it
appears to make sense to have insurance. In contrast, the present
system forces many to pay for drugs "out-of-pocket"; 55
percent of the $36 billion paid for prescription drugs in 1991 was
paid without insurance.[80] There is also a serious disparity between those
that do and do not have insurance. Most of the elderly that do have
drug insurance have it through employer-sponsored plans.[81] Thus, as elders move out of the work force, they
are likely to lose prescription drug coverage when they most need
iL Although Medicaid often covers drup, this is only applicable to
the poorest in society.

A prescription drug benefit would likely increase
utilization of drugs.[82] However, this is not necessarily a bad thing.
Studies have shown that increased utilization from a drug benefit
has gone more to fulfill unmet need than toward
overutilization.[83] This makes sense since, given the present system
(for many elders) where medical procedures are covered by insurance
but prescription drugs (which could avoid the need for costly
procedures) are not, people are less likely to take drugs (since
they'd have to pay) and instead opt for the costly procedures (for
which they won't have to pay) later. In lbct, using this logic,
some studies have shown that imposed limits on drug coverage in
some cases resulted in an actual increase in health care costs and
increased institutionalization of the elderly.[84]

As a result of this evidence, it seems to make
sense that insurance for drugs should at least be considered under
any future health care reform, particularly for the elderly who are
the largest users of prescription drugs. The present Medicare
system of not having a drug benefit may actually be costing the
health care system more in the long run. A secondary benefit to
drug coverage is that it may encourage increased innovation by drug
companies to develop new drugs. Because there will be increased
utilization, drug companies will have more resources and incentives
to find new drugs. However, this is by no means certain. In fact,
the Pharmaceutical Manufacturers Association actually fought
against the MCCA drug benefit because along with prescription
coverage came strict price controls.[85] Thus the effect on the pharmaceutical industry
is not clear.

B. HowshouldcoverageberelatedtoFDAapproval ?

Even if drugs are covered under a health insurance
plan, there is still a question of which drugs should be covered.
One of the most important questions in this vein is what relation
FDA approval should have to coverage. There are a number of
different possibilities, ranging from covering only uses for which
drugs were approved by FDA to deferring to physician discretion.
Present coverage benefit proposals have generally been somewhere in
the middle of these two extremes.

1.DeferraltoFDADeterminations

Although arguments can be made for only reimbursing
drugs approved by FDA for approved uses, this clearly places too
much reliance on FDA. FDA's mission regarding drugs is to protect
the public against drugs which are adulterated,[86] misbranded,[87] or otherwise not safe and effective[88] for use. The FFD&CA is not meant to substitute
FDA's authority for the authority of medical professionals. This is
exemplified by the fact a generally accepted as safe exemption to
the new drug application requirement exists.[89] lf FDA had intended to regulate the practice of
medicine, there would be no reason for a "generally accepted"
exception; the only acceptance that should matter would be FDA's.
Further, FDA has explicitly recognized that physicians may
prescribe approved drugs for unapproved uses.[90] It would be costly and time-consuming for FDA to
certify every possible drug use's medical necessity.

It is also unclear whether a health plan, and
certainly a government health plan such as Medicaid, which requires
coverage of medically necessary items~ could legally refuse to
cover a drug which had been recognized in the medical literature as
effective.[91] Doctors are also much more likely to attempt and
discover inventive procedures and drugs to help their patient than
the FDA is to quickly approve such measures. This is why the
medical literature is so important.[92]

2.De1~rral toDoctors

The opposite extreme is equally untenable. Though
the Medicare statute states that there is a prohibition against
federal interference with the practice of medicine,[93] health insurance reimbursement practices
indisputably affect physicians.[94] In fact, this is precisely what is intended. To a
certain extent, a major aim of government run health insurance is
to not rely solely on physician discretion. In terms of cost
control, it is essential that someone at some point
beahictosaythatenoughisenough.
Inthistimeoflimitedpublicresources,thereisnosensein reimbursing
large amounts of public money for non-cost-effective treatments and
drugs which could be better spent elsewhere. This is embodied in
the Medicare "reasonable and necessary standard."[95]

As managed care becomes more widespread, there is
also the possibility not of deferring to doctors, but deferring to
managed care organizations to make determinations as to what is
best for its clients. Because managed care organizations receive
fixed payments for their clients and because they want to retain
their clients, they have incentives both to provide quality service
and to reduce costs. The question of how drugs should be covered
under managed care is certainly something to consider in future
public health pIans.[96]

3.SomewhereIn-Between

Our present systems, and most of the suggestions
for future reform, are somewhere in between these two extremes. All
four of the schemes examined above depart to some degree from
reimbursing solely on the basis of FDA approval. Similarly, none
look solely to the doctor's discretion. Most look primarily to FDA
and to established compendia for most coverage decisions, with
exceptions. Medicare, for example, makes a specific statutory
exception for "Group C" cancer drugs. The schemes differ
significantly in where they place the discretionary judgment in
bordedine cases. Although Medicare's reasonable and necessary
standard gives the program an effective way to limit coverage,
discretionary decisions are made using the generally accepted
medical practice in local areas, either by judgment of the medical
staff or the Medicare carner. This may make patients nervous as
they await decisions as to whether their ~nent is or is not
covered.[97] Further, as communications improve and as the
discernible diffmnces existing between medical communities seem
less reasonable, this practice may come un~ question.[98] Medicaid formularies present one option, but they
have been attacked when they don't keep up with current medical
practice.[99] Both MCCA and HSA called for HCFA to s~ drug
standards for use (though MCCA precluded use of these standards for
coverage reasons). Perhaps this is a logical place to look for
coverage guidelines~ although at least one commentator is skeptical
of HCFA's resources to comprehensively decide coverage
issues.[100]

A further question is how experimental and
investigational drugs should be covered. While Medicare generally
does not cover these drugs under its reasonable and necessary
standard, these drugs provide the only hope for many terminal
patients. This partly explains the Group C cancer drug exception.
While the HSA planned a committee to examine prices of breakthrough
drugs, no mention was made of coverage issues for investigational
and experimental drugL A system should be devised to allow
individuals desperate for treatments to have some access (without
the drug companies shifting the entire development cost onto the
public insurer).

C. Howshouldover-the-counterdrugsbetreated ?

The ffip side to investigational and experimental
drug coverage is coverage of over-the-counter (OTC) drugs. It is
interesting to note that while costs for prescription drugs have
increased quickly over the last ten years, costs have not similarly
increased for nonprescription items.[101] Aside from the question of whether health
care system costs could be saved by switching drugs WOTC
status,[102] there are some who believe that increased
coverage of prescription drugs by insurance will result in
increased switches of prescription drugs to OTC status.[103] This may come either at the impetus of the
manufacturers[104] or the public insurer, who desperately wants to
reduce costs.[105] If many drugs do switch to OTC status, this
could lead to pressure to extend insurance coverage to OTC
drugs.[106] Some states presently choose to cover
non-prescription drugs under their Medicaid plans.

Government reimbursement of drugs is likely to be
an important part of any future health carereformeffort
Itisinmanywaysanareawhichshouldbecoveredbyinsurancebutisnot Given
that reimbursement may occur, it is important to examine how the
limits of this coverage will be defined. Coverage must mesh with
FDA drug approval, and must confront the physician's practice of
medicine. Cost-effectiveness and cost control are also important.
By looking at existing schemes for coverage of drugs under Medicare
and Medicaid, as weil some of the other recent efforts to propose a
drug benefit, we get some idea of the questions and possible
answers which a drug benefit entails.

[3] Approxiinately 14 percalt were not covered by health
insurance in 1991. 1995 WORLD ALMANAC & BOOK OF FAcrs
967(1994).

[4] I concentrate on coverage issues rather than picing
issues because the former have more relation to Food and Drug Law
and because I can only cover ~ much. This is not to say that
pricing issues, such as required rebates under Medicaid, are
inelevant to a comprehensive examination of governn~it
reimbursement of drugs. However, that paper will have to wait for
another time.

[20] There are a number of different terms used for
insurers which distribute Medicare and Medicaid finids (carriers,
intermediaries, and in some cases liMOs and other managed care
organizations). Rather than parse these words into their specific
technical meanings, I use carrier and fiscal intermediary
interchangeably.

[21] The Medicare program as a whole is codified at 42
U.S.C.A. §* 1395-1395ccc (West Supp. 1994). Part A is
described primarily at 42 U.S.C.A.I~ 1395c-1395i-4 (West Supp.
1994), while Part B is at 42 U.S.CA. §§ 1395j-1 395w-4
(West Supp. 1994).

[37] A number of cases have been litigated contesting
HCFA's determination of whether a drug was "reasonable and
necessary." ~, ~, Friedrich v. H.H.S.,
894 F.2d 829(6th Cir. 1990) (rejecting plaintiffs claim that
Medicare decision not to cover chelation was in contravention of
the reasonable and necessary standard); Pulmocare Pharm. v.
Sullivan. CV No. 91-1291-PA, 1992 U.S. Dist. LEXIS 14528 (D. Ore.
l992Xupholding HCFA decision to not reimburse drug after FDA
notified company of its lack of approval); National Council of
Senior Citizens v. Hams, No. 80-157, MEDICARE ANDMEDICAID
GUIDENEWDEV. ∂30,636,(D.D.C. Aug.27, 1980) (upholding HCFA
decision to reimburse despite FDA action questioning effectiveness.
This predated HCFA regulations that would now require action). In
all of these cases, the court upheld HCFA's determination of what
is and is not reasonable and necessary. ~g Hultmian v. Weinberger,
495 F.2d 1276(1974) (holding that the Secretary may not deny
coverage retroactively when he believes the utilization review
committee did not function properly).

[38] 54 Fed Reg. 4302,4307 (1989) (to be codified
at 42 C.F.R. § 405.380) (proposed Jan. 30, 1989) (No final
rule has been promulgated). It was actually the settlement of a
lawsuit which first provided HCFA with the impetus to propose
regulations outlining the determination process for "reasonable and
necessary." Id.

[41] Nothing in this subchapter shall be constmed to
authorize any Federal officer or employee to exercise and
supervision or control over the practice of medicine or the manner
in which medical services are provided...." 42 U.S.C.A. §
1395.

[61] P~ Conference Rq~ort expects that compendia will
include the U.S. Pharmacopoeia Dispensing Information, the American
Medical Association's Drug Evaluations, and the American Hospital
Formulary Service Drug Information. Conference Report at 192,
r~axiatmIin 1989 U.S.C.C.A.N. 923,970.

[79]soma point risk does become obvious, and
then adverse selection (the idea that only those who need the
insurance-the high risk high
cost people-will purchase
insurance, thus 6iling to spread risks at all) is a wony.

[80] Id. This is in fact one of the argun~nts for
required or universal health insurance. If ~u purchase insmrance
before risks are clear, there is no adverse selection
possibility.